Canada Can Compete?

Christopher Sands

OpenCanada: Will globalization kill Canadian manufacturing?Christopher Sands: I don’t think that Canada is any better or worse prepared for global manufacturing. I say that because I think there are a couple of trends that really are driving change, and those are trends that Canadians can capitalize on if they have their wits about them, just as easily as Americans could.

The first is that manufacturing is becoming much more automated in terms of actual production. We’ve seen three big revolutions in that regard: The Japanese who introduced robotics that can help manage the assembly process; the Germans who introduced programmable machine tools that help with the forming of components; and the Americans who really pioneered design in virtual space, where you could have a whole group of designers and engineers working in cad-cam across a supply chain. They could be all over the world, but in a sort of virtual space designing components with a high degree of precision, so that everything fits as neatly as if it were designed in one place.

Those three things together really changed manufacturing. We use fewer people in the manufacturing process – our manufacturing output in both Canada and the United States has gone up, as our employment in the manufacturing sector has gone down. But our manufactured products are state-of-the-art, and in significant ways I think they’re competitive with what we see coming out of China, India, and other parts of the developing world.

OC: Is Canada poised to take advantage of the increasing decentralization and de-integration of the auto sector?CS: Sure. One of the things that’s happened in the auto sector in the last, say, 20 years, is a gradual move from highly vertically integrated companies – in which, say, General Motors (GM) will have its own parts divisions, all the way down to its own retailers, everything was under one giant hierarchy – to a much more horizontal industry, in which the assembler, who is the brand name that produces the cars, is actually building cars through a chain of suppliers that could stretch around the world. And that’s been something that has been good for Canada.

The 1965 Auto Pact negotiation was driven by Canada, which had always hosted subsidiary auto plants for GM, Ford, Chrysler, and others. Canada’s competitiveness came from a group of suppliers who were trying to participate in the industry by selling components to it. So in that sense Canada was ahead of this move towards horizontal supply chains. Later, as the industry evolved, we found Canada had produced some really world-beating companies, like Magna, that were known for their ability to plug into the supply chain, building whole systems for automobiles – not only for GM, Ford, and Chrysler, but for Toyota, Hyundai and other manufacturers working in North America. Canadian technology was as good, if not better, than anything you’d find anywhere in the world.

What was also important was managing the supply chain, so that companies all over the world were able to deliver consistent quality, consistent environmentally-sensitive product using the right materials and keeping the carbon footprint down, and also making sure when all the components came together, the performance of the vehicle was able to comply with emissions requirements etc… That’s led to the emergence of a number of consulting jobs where people, with a background in engineering and a sophistication when it comes to how we manufacture, are able to connect by visiting various points of the supply of chain, analyzing their operations, collecting data and insuring compliance, and reporting that back to the head company in the supply chain. So Canadians have actually excelled not only as part of the supply chain and as suppliers, but also because of their familiarity with American business practices and their comfort working around the world. They’ve become excellent at the business of securing compliance across the supply chain, taking advantage of a number of Canadian strengths, and giving Canada a new window on some of the manufacturing that’s going on, not only here but globally.

OC: How can Canadian manufacturing be innovative?CS: Well, let me talk a little bit about the four sources we typically see as origin points of innovation and I’ll tell you how Canada fits in each. Certainly one of the sources is the automotive assemblers: GM, Toyota, Ford, and others who do their own research and development internally, and that’s a significant component. Secondly, the suppliers, companies like Magna that are doing their research and development, and trying to apply the latest technology into their work. Third, universities, many of which have research programs designed to apply some of the research that’s being done around the world to the automotive sector, such as that at the University of Windsor. Fourthly, public-private research consortiums the application of which is not automotive, but where innovation could be applied. For example, the U.S. Department of Energy or the US Department of Defence or even Canadian government-funded research.

Innovation could be anything from the guidance systems for unmanned aerial vehicles that contain sensors that could help a car to avoid a collision. Or it could be technology related to the Internet or data transfer that could be useful in the computer components that manage a car’s systems internally. Or, even research that goes into advanced composites that make stronger, lighter military aircraft that could be used in the body of a car. Another area where we’re seeing a lot of innovation is research on electricity storage. Originally for things like pulling energy “off-peak” from the electrical grid and then using it in your household or business when you need it, that research is now being applied into the automotive context, where we still have a challenge when we talk about electric and hybrid cars coming up with lighter and more efficient storage systems.

In all these areas, public-private partnerships are about taking some of the technology out of the lab and putting it into the private sector, into consumer products. These four areas are important for manufacturing—not just in the auto sector but across the economy.

What’s interesting is that Canada is particularly strong: it has always been a place where you’ll see innovation and research and development done by the assemblers. You’ll also see suppliers like Magna and others doing great research. In addition, Canadian universities are stepping up and trying to be innovators in their engineering programs, trying to bring some of these ideas into manufacturing.

Canada has an advantage because a Canadian company is often able to participate in a research consortium that may be out of the University of Michigan, Ohio State University, or elsewhere. The cultural comfort and the familiarity that Canadians have working with Americans allows them to participate as if they are just another American company; they are not considered foreign.

OC: How can the government help to push Canadian manufacturing toward this type of innovation?CS: Well there are a couple of answers to that question, and some of it is what the federal government could do and also what provincial governments could do. One area in which Canada has lagged traditionally is with productivity gains, and innovation gets wrapped up in that. The newer your equipment, the more productive it tends to be.

In the United States, the tax system, both federally and for most states, has allowed an amortization of capital equipment, so that if you buy a heavy piece of machinery or a machine tool or some manufactured robotics, you could depreciate the value every year and pay less tax on it. In Canada you get a capital tax break when you buy the equipment, but its value tends to be assessed at a higher rate, and you don’t get the break year on year. What that means is, for Americans, because you’re depreciating the value over time, you might as well keep on investing in new equipment. Canadian companies often try to work the equipment as long as possible because they’ve only got the tax break upfront, and then they prefer to stick with the old gear a little bit longer. Adjusting the tax system: That’s something that, both federally and provincially, Canadian governments could do to encourage quicker adoption of new technology.

A second area where there’s an interesting challenge that comes to government is in labour-force mobility. Increasingly, Canadians participating in a North American manufacturing base need to have the ability to move freely across the U.S.-Canada border. But our border-security policies have become a barrier. They don’t often stop us from crossing the border, but they can make border crossing miserable by introducing long delays and additional costs. It’s something that we can address by trying to open up the door for the more fluid movement of professionals.

A third, related, problem is that we don’t make it easy enough for students to travel back and forth. Some of our most innovative projects – whether it’s Bill Gates and his friends in the garage developing Microsoft, or Sergey Brin co-creating Google, or Mike Lazaridis co-founding RIM – start with a bunch of young men and women who drink beer, order pizza, have a good time, come up with an idea, and then make it work. I think that the partnerships that form those kinds of innovations are often born of college pals hanging out with common experiences. And to foster that we need to build bridges in our university system to encourage travel for our students studying in fields associated with the manufacturing sector.

OC: Do you think there are enough innovative jobs—the design jobs, the inventor jobs—to replace the loss of jobs in this shift from assembly-line work to more high-skilled labour?CS: Not on a one-to-one basis. I think that for a long time in North America we looked at manufacturing as a jobs-program. Remember that for most of our early history, the largest sector of employment in North America was agriculture. Around the time of the Great Depression, we saw mass migration into cities as the poor agricultural economy, particularly through the dustbowl, led to unemployment for a lot of low-skilled farm workers. We also had waves of immigration from around the world as people with relatively limited skills came here for a chance to work. Manufacturing was the answer because it required muscle, but not necessarily a formal education.

This was a group that also saw the profits of manufacturing higher than the profits of agricultural work, and wanted a bigger share of those profits. Thus, we saw the emergence of a fairly militant trade-union movement in our manufacturing sector, both in the United States and in Canada. The relations between manufacturing employers and their workforces became very rigid, and through a series of highly conflictual negotiations—especially in the auto sector—we saw manufacturing wages rise until they had priced themselves out of competitiveness. The result was that manufacturers began trying to substitute capital for labour. A machine that didn’t require pension benefits or sick days might be expensive, but it was a good substitute for workers. We had contracts in which assembly-line workers, in order to protect their jobs, would refuse to allow the training of, say, an individual worker on 16 machines or every part of the line. This was one big difference between GM, Ford and Chrysler, on one hand, and Toyota, Hyundai and Nissan, on the other.

The Japanese manufacturers came in, paid a competitive wage, and insisted that workers be cross-trained to work in multiple jobs so that they had a flexible production line. This trend in automation was also driven by competition from places like China and India, where wage rates were very low. And it was also driven by competition from other part of the world, like Mexico, where all the bits were made in northern countries like the United States and Canada, and then they were sent to the developing world for final assembly by relatively low-skilled labour. Over time developing countries began saying, “Well, we want to have export-led growth, so we want to produce these cars cheaply and then we want to sell them to the United States and elsewhere.” This put tremendous pressure on automakers during this sort of import-revolution as we started seeing cars coming in from Japan, Korea, and elsewhere competing with the cars that were being produced here in North America. To survive, our manufacturers shifted towards more machinery, and that trend is going to continue.

Today, what we see is a competition for North American labour on the basis of an innovation obsolescence. Each new vehicle has more bells and whistles, more clever gadgets than the car that came before, and we’re constantly introducing new and dynamic features to what we’re producing. Then we see Japan, to a greater extent even China and India, doing imitations of some of what we’re producing. And as they imitate our technology, they’re often doing so at a lower level. They’re using their cheap-labour advantage and, to some extent, intellectual-property piracy to produce second-rate versions of what we’re producing.

We’ve stayed competitive by always staying one step ahead and by shedding manufacturing employment. Our manufacturers are hiring increasingly brainier, better educated and more flexible workers; they may work with the manufacturer for five or six years and then find themselves in consumer electronics or software programming. This new mobility is typical of changes across the workforce, and I think that we’re seeing the end of a particular mode of manufacturing employment. Will it be there to employ our low-skilled, low-education labour in the future? I don’t think so. Will it continue to employ Canadians and Americans even in the face of competition from China? Yes, absolutely. I’m afraid there’s no way to turn that around for any of us. It’s just part of how globalization is changing the economy of the world.